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Cents and Sensibility

BY GUY STEELE

Saturday, January 5, 2002

Take advantage of tax breaks

If you're reading this, you probably have received your tax rebate check from the federal government. However, the Tax Relief Act of 2001 provides more than rebate checks.

It includes provisions that could impact your financial security, from college savings to retirement planning.

Retirement planning

For the first time since 1981, the contribution limit to an individual retirement account (IRA) is changing. Beginning in 2002, you can make a $3,000 contribution (up from $2,000) to your Roth or traditional IRA. That figure will increase incrementally until 2008, when the annual IRA contribution will be $5,000.

After 2008, IRA contributions will be adjusted in $500 increments annually for inflation. And if you are at least 50 years old, you may be able to make catch-up contributions to your IRA.

Increasing your contributions means more security during retirement. An eligible married couple could contribute $7,000 in 2002.

The new legislation also will increase the contribution limits on your 401(k) and other employer-sponsored retirement plans.

College savings

Education IRAs have a new name -- Coverdell education savings accounts -- and a new annual contribution limit of $2,000, up from $500.

By maximizing your annual contribution, you'll make that college savings fund grow faster.

Qualified state tuition plans or 529 plans have become popular, and that popularity just may grow. Earnings are not taxed as they accumulate and significant amounts can be contributed.

And as a result of this new legislation, earnings that were previously taxed can be withdrawn tax-free to pay for higher education beginning in 2002.

Small business owners

Another provision in this sweeping legislation allows for incentives given to small business owners looking to start company-sponsored retirement plans for their employees.

Business owners with 100 or fewer employees can receive a tax credit of up to $500 during each of the plan's first three years when establishing a new qualified retirement plan in 2002.

Additionally, the $1.35 trillion tax-cut bill offers an increase in the child credit, provides marriage penalty relief, eliminates the death tax by 2010, and provides for both short- and long-term economic growth.

This new legislation helps Americans plan better for today and tomorrow.

So remember to take advantage of all the available tax incentives this new plan offers.

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Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com